Japan’s election on December 16 is going to be a doozy.
It’s probably the first election where the role and independence of the central bank is a key issue, says Gavyn Davies. There’s also rather a lot of yen short positions that are riding, at least in part, on the outcome — IMM data out over the weekend shows net shorts have built to levels not seen since 2007.
Shinzo Abe, leader of the opposition LDP, has been loudly calling for a more activist Bank of Japan, that more aggressively pursues an inflation level of 2 or 3 per cent (it varies). There is some uncertainty over exactly what Abe will do: he’s reportedly called for the BoJ to purchase government construction bonds, but on Friday said when in government he would not comment on the measures the BoJ should use. It still seems very likely however that there will be pressure for more aggressive easing.
After the election itself, attention will turn to how the outcome will determine the appointment of a new Bank of Japan governor, and the two deputies. This will happen in April, when the terms of the current governors end.
The LDP is expected to get the largest amount of votes, although they will need a coalition with another party to form government. And this will not give the LDP carte blanche to make its own BoJ appointments. The December election is only for the lower house; the appointment of the governor requires approval of both houses and no single party controls the upper house.
Also, it might be a cliffhanger — as Nomura’s Yujiro Goto, Yunosuke Ikeda, Naka Matsuzawa and Tomo Kinoshita explain:
When former Governor Toshihiko Fukui retired in 2008, the Fukuda Cabinet submitted its nominations — then Deputy Governor Toshiro Muto for governor; Kyoto University Professor Masaaki Shirakawa and Tokyo University Professor Takatoshi Ito for deputies — to the Diet steering committee on 7 March, 12 days before Governor Fukui’s term ended on 19 March (Figure 1). The candidates appeared before the joint steering committee on 11 March, and the Diet voted the day after, one week before Governor Fukui’s term finished.
[Tl;dr version: Shirakawa was approved by both houses but Muto and Ito were not; Shirakawa was acting governor until April 9, when he was approved as governor by both houses.]
So, who are the contenders, and what does each one represent?
While we’d caution reading too much into who is appointed — as David explained last week, even if we know or assume exactly what path of action the post-April BoJ will take, the outcomes of such actions are far from certain.
Nomura sees it breaking down like this: there are four contenders, and of them two (Iwata and Takenaka) are from academic backgrounds and support aggressive monetary easing. Another two contenders, Muto and Katsu, have Ministry of Finance backgrounds and are cooler on monetary easing, although even they appear to be more dovish than Shirakawa:
Based on various media reports, the current favorites job are Kazumasa Iwata (a former BOJ deputy governor), Heizo Takenaka (former minister of state for economic and fiscal policy), Toshiro Muto (former administrative vice minister of finance and a former BOJ deputy governor) and Eijiro Katsu (former administrative vice minister of finance). Although the trend in filling the top three posts – the governor and two deputies – has been to strike a balance between one person from an MOF background, one from academia and one from the Bank itself, we think the next governor is less likely to come from a BOJ background. We think it is more likely to be a choice between either Mr Iwata or Mr Takenaka, both of whom come from academia, and either Mr Muto or Mr Katsu, both of whom come from the MOF (Figure 4).
The two academics are both in favor of aggressive monetary easing. Mr Iwata is the only one of the four to have explicitly said that the inflation target should be lifted to 2%. He is also enthusiastically in favor of overseas bond purchases by the BOJ. The LDP’s election pledge about a public-private foreign bond fund may well have been
inspired by a talk that Mr Iwata gave to an LDP study group on precisely this topic. Meanwhile, Mr Takenaka is an equally aggressive proponent of monetary easing. He is particularly confident about the benefits of quantitative easing, whereby the BOJ expands its balance sheet via JGB purchases. Relative to the Shirakawa doctrine of sustained but tentative monetary easing, we think a Takenaka governorship would
result in the sharpest changes in direction at the BOJ.
By contrast, Messrs Muto and Katsu, with their MOF backgrounds, are more reserved about monetary easing. Mr Muto has said that numerous policy options are available and although he is clearly more dovish than Mr Shirakawa, he has not suggested anything more exotic than the BOJ’s current asset purchasing programs.
He is also somewhat negative about inflation targeting, saying it would not necessarily be a good idea to raise the target to 2% before achieving 1% inflation. He is also markedly negative about the purchase of overseas bonds, which may reflect his MOF background.
Meanwhile, Mr Katsu’s lack of public pronouncements makes his monetary policy stance difficult to gauge, but we assume that his views are broadly similar to Mr Muto’s. He was, however, one of the advocates of the bill to hike the consumption tax. We assume that he will be looking for Japan to escape deflation by the time the consumption tax is hiked (for the first time) in April 2014. Mr Katsu also has a good knowledge of global financial markets, having been responsible for yen selling intervention while working at the MOF in 1995.
Here they all are, in a handy chart(s) – click to expand: